Pensions Reform

I am grateful to the hon. Lady for her intervention, and the Secretary of State is absolutely right, in that it is not open to anybody to reject all the elements of the package that save money for the Exchequer and then say that they would like to have all the elements that cost money. This has got to be affordable; we are fully signed up to that. The issue is about transparency and getting the debate going. I reiterate to the Secretary of State the point that the hon. Member for Yeovil (Mr. Laws) made. If we are to have a consensus-building process, it must involve our being able to ask questions to probe the detailed arrangements being put forward as part of this package. The Secretary of State cannot say to us that no cherry-picking means no right to question the route that has been chosen to deliver the objectives. We must be able to look in a grown-up way at how the arrangements work. My first point, then, is that transparency and openness in respect of the assumptions that lie behind the package and its financing are prerequisites for a durable consensus. But the other key concerns that need to be addressed, and on which I shall focus, are the impact of means-testing, the design of a workplace saving scheme and its interaction with existing occupational pension schemes, the certainty of the timetable for implementation, and pubic perceptions of the fairness and security of the pension system. The key purpose of the package is the promotion of saving among not just the 5.2 million people who are not saving at all, but the rest of the population, many of whom are not saving sufficiently for a decent income in retirement. The pension credit has created an expectation of growing levels of means-testing, with consequent effects on savings behaviour that we now collectively need to assess and address. We welcome the Secretary of State’s confirmation that it was never intended that means-testing should reach the 75 or 80 per cent. level predicted by Turner for 2050, but there remain major concerns about its impact on the proposed package. The Government themselves say that there will be about 30 per cent. means-testing in the system by 2050. Other experts—notably the Pensions Policy Institute—disagree with the baseline assessment and therefore arrive at a higher level; they suggest that as much as 45 per cent. of the pensioner population could be means-tested by 2050. Whether the proportion is 30 or 45 per cent., a serious question is being asked by expert observers: will means-testing at these levels, institutionalised as a permanent feature of the system, undermine the package’s key savings-promoting objective? We must look at what impact this level of means-testing will have on the savings behaviour of—typically, but not always—people on the lowest incomes. They are most likely to have interrupted work patterns throughout their lives, and are thus most likely to be entitled to means-tested benefits in retirement. The fact is that we simply do not know what the answer is—we are in what I suggest is uncharted territory. This is probably the first time that we have had to consider behavioural responses to a long-term stable environment of moderately generous means-tested benefits. Historically, such benefits have been used as a safety net to catch a small number of people who have fallen through the system. Now, we are looking at a system that could be extensive enough to impact on people’s lifetime savings patterns. The irony is that we are having to grapple with the behavioural consequences of the very consensus that we are trying to build, which will give people the certainty that they can plan on the basis of those means-tested benefits being available to them in retirement. This will be a key area of the debate, and the Government can help us in several ways: by giving a commitment to publishing the full range of outcomes of their modelling of the extent of future pension credit eligibility; by commissioning more work on the impact on savings behaviour of different levels of means-tested benefit eligibility; and by extrapolating beyond 2050 the projected outcomes for paid individuals. The Secretary of State said that 2050 was about the limit of his predictive power, but I put the following point to him. In the case of the low-paid earner used in the regulatory impact assessment, the assumption is that someone will have contributed for 52 years of continuous work. A person who is 16 in 2012, when the scheme starts, and who contributes for 52 years will be looking for an outcome in 2064. It is therefore essential that we project further forward so that people in that position can understand the likely scenario facing them. We also need to see a range of real world outcomes. The truth is that most people will not work for 52 years in unbroken employment. Many people who will be on the margins of the savings decisions will have broken work records, and will need to know whether saving will pay for them. It is legitimate to rely on auto-enrolment only if we are sure that we are auto-enrolling people into a scheme that leaves them better off by saving. The Conservatives would have serious misgivings about an auto-enrolment scheme that brought people into a savings system that would leave them less well off, or no better off, than they would have been had they not saved. We need to be confident that it is safe to recommend saving for the overwhelming majority of people, including those whose employment record is discontinuous. More will have to be done to demonstrate that that will be the case. Much of the public comment on the White Paper has focused on the changes to the state pension arrangements and the introduction of the auto-enrolled workplace savings scheme, but until very recently Britain had a first-class workplace pensions savings system. Changes in the environment, which I have already described, have greatly reduced that provision, and most commentators now accept that defined benefit schemes in the private sector are on the way to extinction; however, high-quality defined contribution schemes remain, with employer contributions well in excess of the 3 per cent. compulsory level proposed for the national pensions savings scheme. As the Secretary of State knows, there is a real risk that the introduction of the NPSS, or a similar scheme, will act as a catalyst not only of the final demise of defined benefit schemes, but of a downgrading of employer contributions to existing defined contribution schemes. The White Paper contains welcome provisions for a review of the regulatory environment surrounding occupational pension schemes. It is vital that that work be done soon and that the outputs from it are implemented well in advance of the introduction of an auto-enrolled scheme, because history will judge our putative consensus harshly if what we deliver is a pyrrhic victory, with a national pensions savings scheme that results in the downgrading of many people’s employer pension contributions from higher levels to 3 per cent.